The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. Presenting a live 90-minute webinar with interactive Q&A ERISA Pension Plan Overpayments: Navigating Conflicting Fiduciary Obligations and IRS Guidance Preventing or Uncovering Errors Before Distribution, Restoring Losses and Protecting the Plan's Tax Qualification Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, JULY 8, 2015 Carol Buckmann, Counsel, Osler Hoskin & Harcourt, New York Arthur A. Marrapese, III, Partner, Employee Benefits Practice Leader, Hodgson Russ, Buffalo, N.Y. William H. Woolston, Esq., Covington & Burling, Washington, D.C.
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Transcript
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
Presenting a live 90-minute webinar with interactive Q&A
ERISA Pension Plan Overpayments:
Navigating Conflicting Fiduciary
Obligations and IRS Guidance Preventing or Uncovering Errors Before Distribution,
Restoring Losses and Protecting the Plan's Tax Qualification
If the plan is able to recover the full amount from another person (e.g., the employer, fiduciary, or negligent service provider) the plan need not consider recoupment of the overpayment.
It may be prudent for the plan that made the overpayment to recoup on a time payment basis.
It may be prudent to reduce future benefit payments, in accordance with the provisions of the plan, if other reasonable attempts to collect the erroneous amount have failed.
Terminating a participant’s or beneficiary’s eligibility for benefits under the plan to which the money is owed (or any other plan) until the full amount is repaid would likely violate the exclusive benefit and prudent person rules.
Litigation Issues- Plan Fiduciary and Participant Suits
Carol Buckmann
Overview of Issues
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Is there a statute of limitations on these claims? If so, what is it? Do ERISA’s 3 year or 6 year limitations periods apply? U.S. Supreme Court in Tibble v. Edison found limitations
period began to run each time allegedly imprudent fund was not replaced.
135 S. Ct. 1823 (2015) This does not necessarily mean that all past
overpayments can be recovered. May be limited to overpayments made during the limitations period.
Must the participant exhaust claims and appeals procedures before challenging benefit reductions?
Can the plan charge interest? Has the plan document reserved the right to reduce
payments to correct overpayments?
Overview of Issues (Cont’d)
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Has the SPD or benefit statement reserved the right to reduce payments to correct overpayments?
Is a deferential Firestone standard of review available?
What about state law claims, such as for fraud or fraudulent misrepresentation?
ERISA pre-emption
Issues for Fiduciaries Considering Lawsuits to Recover Past Overpayments
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Is this an isolated mistake or was there a calculation error affecting many retirees?
Can retirees appeal? In 2014, a federal court found that Blue Cross Blue Shield’s recoupment practices failed to comply with ERISA’s notice and appeal requirements and permanently enjoined them. See 2014 WL 1276585 (N.D. III. Mar. 28, 2014)
Does the plan sponsor want to make up for the losses due to overpayments?
Would suit against the retiree be futile? Can the plan be amended to allow overpayments to
continue? Extent to which retiree hardship may be considered. Ability to enter into settlement Venue
Earlier Cases Recognized Right to Recoup
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Prior to CIGNA, many courts treated mistakes in
benefit payments as correctible recordkeeping errors rather than fiduciary breaches.
See, e.g., Stark v. Mars, 2012 WL 2918410 (S.D. Ohio, July 17, 2012), finding no fiduciary breach for call center mistake based on computer error
In Johnson v. Retirement Program Plan, 2007 WL 649280 (E.D. Tenn, 2007), the court held that a plan subject to ERISA could legally recoup overpayments made to a retiree.
See also, e.g., Wells v. United States Steel & Carnegie Pension Fund, 950 F.2d 125 (6th Cir. 1991)
Also recognized that recoupment may be unavailable under general equity principles if it results in hardship
CIGNA v. AMARA Expands Available Participant Challenges to Recoupment
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The U.S. Supreme Court stated that traditional equitable remedies are available to participants for fiduciary breach in a claim under Section 502(a)(3) of ERISA (11 U.S.C. Section 1132(a)(3)):
Reformation Estoppel Surcharge
131 S. Ct. 1866 (2011) These claims are being asserted offensively in suits
brought by participants to keep their overpayments, not just as defenses in suits brought by plan sponsors.
CIGNA v. AMARA Expands Available Participant Challenges to Recoupment (Cont’d)
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Reformation remedy was applied on remand in CIGNA. See the Second Circuit Court of Appeals decision at 775 F.3d 510 (2014), affirming the lower court decision that communications fraudulently misrepresented the plan provisions. Reformation gave participants the higher benefit they thought they were entitled to.
CIGNA v. Amara-Estoppel and Reformation
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After CIGNA, plaintiff’s lawyers will seek to characterize all overpayments as fiduciary breaches
Plaintiffs in pay status may try to enjoin the plan from reducing benefits on estoppel grounds.
Estoppel traditionally requires detrimental reliance Gabriel v. Alaska Elec. Pension Plan Gabriel never qualified for a vested benefit, but sued for
equitable relief to keep his pension 755 F. 3d 647 (9th Cir. 2014) Estoppel and reformation are not available. The Ninth
Circuit will not apply estoppel when relief would be contrary to clear written plan provisions to preserve actuarial soundness of plans. Remanded for a determination whether surcharge applied.
CIGNA v. Amara-Estoppel and Reformation (Cont’d)
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Paul v. Detroit Edison Company (2015 U.S. Dist. LEXIS 40061,E.D. Mich, March 2015)
District court decision in which plan sponsor was estopped from correcting pension. Plaintiff repeatedly asked for confirmation that his calculation was correct. Court found that the calculation was so complicated, the retiree could not do the calculation himself.
Can the participant raise the equitable defense of laches?
Laches traditionally required prior knowledge
CIGNA v. AMARA-What About Surcharge?
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Surcharge remedy is also sought to get fiduciary to contribute to fund to make up losses (extra payments)
Does not traditionally require detrimental reliance. Remand in Gabriel to determine whether
surcharge is available was due to intervening CIGNA v. Amara decision, though decision does not make it seem likely Gabriel will prevail.
Surcharge was traditionally used to require fiduciaries to disgorge profits from their breaches
Not obviously applicable to overpayments where fiduciary did not benefit, but being actively pursued by plaintiff’s counsel.
What About Benefit Estimates?
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Estimates may be provided years before payments commence, so no recoupment or surcharge may be available.
Benefit statements usually have a statement that future corrections may be made
Recent decision by Court of Appeals for the 7th Circuit re: estimates, Reilly v. Continental Casualty Company, 785 F.3d 261 (2015)
Dealt with a deferred vested participant seeking to rely on estimate given at termination of employment
Court found that plan sponsor didn’t adequately explain the adjustment, but that Reilly nevertheless had to put forth an alternative calculation to prevail.
Couldn’t prevail simply due to sponsor missteps No estoppel claim was raised-what would be
detrimental reliance?
Special Considerations for Public Plans
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May have their own procedures to be followed before adjusting benefits
In at least one case, participants successfully argued in a class action that state wage withholding law requiring consent had been violated when Portland tried to recoup overpayments from Fire & Police Retirement Fund . See City of Portland, July 26, 2012
Portland settled for 60% of the overpayments, to be recouped from future COLA adjustments and paid plaintiffs’ legal costs.
Settlement was approved by IRS in a VCP compliance statement available online at www. portlandoregon.gov/fpdr/article/454677
Probably no ERISA pre-emption Need to consult statutes and state constitution An act of the legislature may be required to amend plans SS Admin and FERS can take equitable considerations and hardships into
account in determining whether to correct overpayments. Under 5 U.S.C. Section 8470, FERS recovery may not be made if “the
individual is without fault and recovery would be against equity and good conscience.” Under FERS regulations, financial hardship may be taken into account, such as when the beneficiary needs income to meet ordinary living expenses.
Under 42 U.S.C. Section 404(b), Commissioner of the SSA may also take into account physical, mental, educational or linguistic limitations of the recipient
On the Horizon
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U.S. Supreme Court has granted cert in Montanile v. Board of Trustees, 135 S. Ct. 1700 (2015)
11th Circuit decision is unpublished-593 Fed. Appx. 903, 2014 U.S. App. LEXIS 22438 (2015)
Deals with a welfare (disability) plan, but will impact all ERISA plan recovery claims
Must there be identifiable tracing of assets to a specific sum of money that would be subject of equitable recovery in order for plan to prevail?
Lower courts said plan could impose an equitable lien on tort settlement proceeds even if those monies had been spent.
Will procedures used by SS Administration, FERS or the PBGC be a model for new legislation or regulation dealing with pension overpayments?
Another possible model: PBGC does not demand interest
More Questions?
Contact: Carol Buckmann, Osler, Hoskin & Harcourt LLP
Any U.S. tax or other legal advice in this communication (including in any attachment) is not intended and is not written to be used, and it cannot be used, by any person to (i) avoid penalties under U.S. federal, state or local tax law, or (ii) promote, market or recommend to any person any transaction or matter addressed herein.
Is the contribution a nonelective contribution or restorative contribution?
A contribution is “restorative” if:
the contribution restores losses resulting from a fiduciary breach for
which there is a reasonable risk of liability; and
similarly situated participants are treated in a uniform fashion.
Nature of Corrective Contribution
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EMPLOYER TAX ISSUES
If the contribution exceeds the amount of the loss, the excess would be treated
as a nonelective employer contribution.
In virtually all cases, overpayments corrected in accordance with EPCRS would
be considered restorative payments, and not plan contributions.
See Rev. Rul. 2002-45.
Nature of Corrective Contribution
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EMPLOYER TAX ISSUES
Restorative contributions are deductible as a business expense under IRC §162
if they are in settlement of an actual or potential fiduciary claim to which the
employer is exposed as a fiduciary.
See, for example, PLR 9822043. See also PLR 201440027.
Deductibility of Restorative Contributions
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PARTICIPANT TAX ISSUES
The plan reduces further payments to the recipient so that the actuarial present
value of the reduction is equal to the overpayment plus interest.
The recipient is taxed on the amount actually received; the amount recovered
via offset is not taxed.
The recipient may not deduct the amounts attributable to the offset as a loss
deduction under IRC §165(a).
Rev. Rul. 2002-84, Situations 1 and 2.
Recoupments Via Offset Against Future Benefits
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PARTICIPANT TAX ISSUES
If the overpayment and repayment occur in the same tax year, the repayment would simply reduce the taxable amount, and a 1099-R reflecting the actual payment minus the reduced payment would be issued.
If the repayment occurs in a subsequent tax year, the repayment is treated as a loss deduction under IRC §165(a).
If the repayment is $3,000 or less, the repayment is subject to the 2% adjusted gross income threshold for miscellaneous itemized deductions under IRC §67(a).
If the repayment is more than $3,000, the AGI threshold does not apply and the deduction is based on the rules for restoration of a substantial amount held under a claim of right set forth in IRC §1341.
Rev. Rul. 2002-84, Situation 3.
Recoupment Via Repayment
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PARTICIPANT TAX ISSUES
The overpayment is treated as a taxable distribution followed by an improper
rollover to the IRA. See, e.g., CCA 201313025.
The overpayment is subject to an excise tax of 6%. IRC §4973.
Any portion of any overpayment that remains in the IRA as of the end of a
subsequent taxable year is subject to another 6% excise tax, to the extent the
overpayment exceeds the individual’s IRA contribution limit for the taxable year.
Overpayments Included in Amounts Rolled Into Traditional IRAs
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PARTICIPANT TAX ISSUES
The following relief is available as part of a VCP submission in appropriate cases:
The IRS will not pursue the excise tax under §4973 if the recipient withdraws the overpayment (adjusted for earnings) and returns that amount to the plan. Rev. Proc. 2013-12, §6.09(5)(a).
If the overpayment was not made pursuant to a distributable event, the plan sponsor must request excise tax relief as part of the VCP submission and provide an explanation supporting the request. Rev. Proc. 2013-12, §6.09(5)(c).
If the failure involves an overpayment that is not made pursuant to a distributable event, the IRS will not pursue the IRC §72(t) penalty (10%) if the recipient returns the improperly distributed amount, adjusted for earnings, to the plan. Rev. Proc. 2013-12, §6.09(6).
Overpayments Included in Amounts Rolled Into Traditional IRAs
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PARTICIPANT TAX ISSUES
Excess contributions can be corrected by withdrawing them (with earnings) by
the due date (including extensions) of the federal tax return for the tax year for
which the excess contributions were made. IRC §408(d)(4).
Relief may be available if a recipient reasonably relies on erroneous information
the plan was required to provide (e.g., an incorrect 1099-R). IRC §408(d)(5).
Overpayments Included in Amounts Rolled Into Traditional IRAs
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PLAN DRAFTING CONSIDERATIONS
The plan document and SPD should require repayment plus interest and authorize offset of future payments until the plan is made whole, regardless of when the overpayment occurred.
A person or other party who receives any Plan payment to which he or she is not entitled under the terms of the Plan, must reimburse the Plan for the full amount of the improper payment plus interest. If the person or other party fails to repay the improper payment on or before the 90th day following the day such person or other party receives notice of the amount due, such person or other party shall be liable to the Plan for any and all reasonable and necessary costs incurred by the Plan to enforce its repayment right. The Plan shall have the right to recoup improper payments by reducing, entirely or in part, benefit payments or other payments to which the person or other party is otherwise entitled.
Repayment/Recoupment Provisions
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PLAN DRAFTING CONSIDERATIONS
The plan document and SPD should contain a forum selection clause.
Are venue selection clauses consistent with ERISA?
A majority of courts that have considered the question have upheld the
validity of venue selection clauses in ERISA-governed plans.
See, for example, Smith v. Aegon Companies Pension Plan, 769 F.3d 922
(6th Cir. 2004) (the Aegon pension plan’s venue selection clause was valid
and enforceable).
Venue Selection Clause
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PLAN DRAFTING CONSIDERATIONS
The plan document and SPD should contain a carefully worded provision designed to defend an estoppel claim:
No person is entitled to any benefit under the Plan except and to the extent expressly provided under the terms and conditions of the Plan. For example, the fact that payments have been made from the Plan in connection with any claim for benefits does not establish the validity of the claim; provide any right to have such benefits continue for any period of time; or prevent the Plan from recovering the benefits paid to the extent that the Administrator determines that there was no right to payment of the benefits under the Plan. No person who claims a right to benefits under the Plan may base that claim on any oral or written statement made by any person. The provisions of the Plan govern over any inconsistent benefit information given to a person, orally or in writing, regardless of the source.